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Market Analysis

Fundamental Analysis: Dollar down on Disappointing NFP

June 07, 2019
BY Michael Stark

Today’s weaker NFP release has had a negative effect on the dollar this afternoon GMT. The figure of 75,000 was less than half of the consensus, 185,000. Other employment data from the USA today was also quite negative. The effect on the dollar has been significant due to the context of the Fed’s openness to cutting rates.

Euro-dollar surged upward today, reaching significantly above the important resistance area of $1.13. This symbol is currently trading at $1.1325. Dollar-yen moved down to about ¥108 but did not reach any new low. Cable meanwhile has been trading within the area of $1.275 after the releases.

Weaker NFP but other data mixed

Although the NFP is of course notoriously difficult to predict with much accuracy, today’s figure was very negative. Apart from January’s outlier, today’s figure for May at 75,000 is the weakest result since late 2017. It stands against the previous 224,000 and expectations for about 185,000.

The USA’s other important releases this afternoon were somewhat mixed. Annual growth in average hourly earnings was down slightly to 3.1%. On the other hand, unemployment was static at 3.6%, the lowest figure since early 1971.

Disappointing PMI and perhaps lower growth

The figures today weren’t catastrophic by any means, but they do come in the general context of somewhat weaker growth in the USA. Trade wars certainly appear to be a factor. Manufacturing PMI on Monday was also considerably weaker than expected, and personal spending was also down last week.

Consumer spending is one of the key factors used to inform any central bank’s decision on rates. Non-farm payrolls can function as a fairly good indicator of the outlook in this area for the USA, so today’s figure could be a factor supporting rumors of a rate cut by the Fed.

Rate cut rumors might just be rumors

That said, a refusal to rule out a cut is obviously not the same as an inclination to cut. Last year’s moves by the Fed resulted in no less than four hikes of 25 basis points. These were despite ongoing trade wars. Accordingly, a sudden change of direction at this stage seems to be fairly unlikely. Other statistics like GDP growth and inflation remain fairly strong and generally within targets.

Equally, some consideration should be given to the context of the Fed’s rate compared with other central banks. Even if there was a cut to 2-2.25%, this would still be a significantly higher base rate than any other G7 country.

Inflation data next week key for USD

Based on the volume of recent discussion on rates, Wednesday’s inflation data could be even more important than usual. The USA is scheduled to release annual inflation (core and non-core) on June 12 at 12.30 GMT. A decline in non-core inflation based on the current consensus could mean some more headwinds for USD.

Tuesday’s also quite a big day in American data, though. The four PPI releases at 12.30 GMT might bring some stability if the forecasts for stability turn out to be accurate.

Looking a bit further ahead, Friday June 14 also features two crucial figures: retail sales and consumer sentiment. However, the biggest news coming up for the dollar this month is the Fed’s meeting on June 19. Stay tuned to FX News in the meantime for the latest updates on the data and news that could affect the decision.

Some retracement for the dollar seems likely

Although the dollar’s fundamentals have been less strong lately, they do not essentially support today’s significant downward movement. A degree of retracement seems to be favorable in the absence of more major news.

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